Provision for Income Taxes

The components of the Company’s provision for income taxes for the years ended December 31, 2017, 2016, and 2015 were as follows:



(dollars in thousands)	2017			2016		2015
Current:
Federal	$	73,176		$	69,061	$	73,278
State	6,039			1,885		3,737
Total Current	79,215			70,946		77,015
Deferred:
Federal	5,042			6,947		(6,801		)
State	(865		)	240		284
Total Deferred	4,177			7,187		(6,517		)
Provision for Income Taxes	$	83,392		$	78,133	$	70,498

The tax effects of fair value adjustments on available-for-sale investment securities, the amortization of unrealized gains and losses related to investment securities transferred to held-to-maturity, the minimum pension liability adjustment, and tax benefits related to stock options are recorded directly to consolidated shareholders’ equity. The net tax benefit recorded directly to consolidated shareholders’ equity was $0.5 million and $7.9 million for the year ended December 31, 2017 and December 31, 2016, respectively. The net tax charge recorded directly to consolidated shareholders’ equity was $1.0 million for the year ended December 31, 2015.

Deferred Tax Liabilities and Assets

As of December 31, 2017 and 2016, significant components of the Company’s deferred tax liabilities and assets were as follows:



	December 31,
(dollars in thousands)	2017			2016
Deferred Tax Liabilities:
Accrued Pension Cost	$	(11,245	)	$	(13,292	)
Federal Home Loan Bank Stock	(3,408		)	(5,088		)
Lease Transactions	(57,458		)	(87,454		)
Energy Tax Credits	(8,821		)	(10,476		)
Investment in Variable Interest Entities	(3,407		)	(1,883		)
Deferred Loan Fees	(6,903		)	(9,088		)
Originated Mortgage Servicing Rights	(6,646		)	(9,588		)
Other	(1,883		)	(691		)
Gross Deferred Tax Liabilities	(99,771		)	(137,560		)
Deferred Tax Assets:
Accelerated Depreciation	1,844			6,027
Allowance for Loan Losses	30,148			43,705
Minimum Pension Liability	12,114			18,852
Accrued Expenses	9,937			18,693
Postretirement Benefit Obligations	8,595			12,900
Capital Lease Expenses	2,168			3,235
Restricted Stock	6,223			7,955
Net Unrealized Losses on Investments Securities	3,059			3,271
Deductible State and Local Taxes	2,461			3,956
Other	5,183			7,596
Gross Deferred Tax Assets Before Valuation Allowance	81,732			126,190
Valuation Allowance	(955		)	(3,655		)
Gross Deferred Tax Assets After Valuation Allowance	80,777			122,535
Net Deferred Tax Liabilities	$	(18,994	)	$	(15,025	)

Accounting Standards Codification (ASC) 740, Income Taxes, requires the effects of changes in tax rates and laws on deferred tax balances to be recognized in the period in which the legislation is enacted. Since the Tax Cuts and Jobs Act was enacted on December, 22 2017, the Company revalued and adjusted its deferred taxes by recording an additional $3.6 million tax expense in December 2017. The Company’s deferred tax balances as of December 31, 2017 are based on the 21% federal tax rate which is expected to be in effect during the periods in which the temporary differences reverse, while deferred tax balances as of December 31, 2016 are based on the 35% federal tax rate.

Both positive and negative evidence was considered by management in determining the need for a valuation allowance. Negative evidence included the uncertainty regarding the generation of capital gains in future years and restrictions on the ability to sell low-income housing investments during periods when carrybacks of capital losses are allowed. Positive evidence included capital gains in the current year and carryback years. After considering all available evidence, management determined that a valuation allowance to offset deferred tax assets related to low-income housing investments that can only be used to offset capital gains was appropriate. Management determined that a valuation allowance was not required for the remaining deferred tax assets because it is more likely than not these assets will be realized through future reversals of existing taxable temporary differences, future taxable income exclusive of reversing temporary differences, and taxable income in prior carryback years.

Certain events covered by Internal Revenue Code Section 593(e) will trigger a recapture of base year reserves of acquired thrift institutions. The base year reserves of acquired thrift institutions would be recaptured if an entity ceases to qualify as a bank for federal income tax purposes. The base year reserves of thrift institutions also remain subject to income tax penalty provisions that, in general, require recapture upon certain stock redemptions of, and excess distributions to, shareholders. As of December 31, 2017, retained earnings included $18.2 million of base year reserves for which the deferred federal income tax liability of $4.8 million has not been recognized.

Effective Tax Rate

The following is a reconciliation of the statutory federal income tax rate to the Company’s effective tax rate for the years ended December 31, 2017, 2016, and 2015:



	2017		2016		2015
Statutory Federal Income Tax Rate	35.00	%	35.00	%	35.00	%
Increase (Decrease) in Income Tax Rate Resulting From:
State Taxes, Net of Federal Income Tax	1.50		0.60		1.23
Tax Reserve Adjustments	0.09		(0.18	)	0.38
Low-Income Housing Investments	(1.18	)	(0.69	)	(0.78	)
Investment Tax Credits	(1.03	)	(0.85	)	(0.89	)
Bank-Owned Life Insurance	(0.85	)	(0.88	)	(1.06	)
Tax-Exempt Income	(2.57	)	(2.71	)	(3.03	)
Excess Tax Benefits - Stock Compensation	(0.83	)	—		—
Deferred Tax Adjustment for Tax Rate Change	1.25		—		—
Other	(0.27	)	(0.19	)	(0.36	)
Effective Tax Rate	31.11	%	30.10	%	30.49	%

The Tax Cuts and Jobs Act changed the corporate tax rate from 35% to 21%, effective January 1, 2018. The impact on deferred tax assets and liabilities was recognized as an additional income tax expense of $3.6 million in the fourth quarter of 2017, when the act was signed into law.

Unrecognized Tax Benefits

The Company is required to record a liability, referred to as an unrecognized tax benefit (“UTB”), for the entire amount of benefit taken in a prior or future income tax return when the Company determines that a tax position has a less than 50% likelihood of being accepted by the taxing authority. The following presents a reconciliation of the Company’s liability for UTBs for the years ended December 31, 2017, 2016, and 2015:



(dollars in thousands)	2017			2016			2015
Unrecognized Tax Benefits at Beginning of Year	$	6,574		$	11,602		$	12,229
Gross Increases, Related to Tax Positions Taken in a Prior Period	273			145			398
Gross Decreases, Related to Tax Positions Taken in a Prior Period	—			(230		)	(98		)
Gross Increases, Related to Current Period Tax Positions	1,124			395			573
Settlement with Taxing Authority	—			(1,002		)	—
Lapse of Statute of Limitations	(2,679		)	(4,336		)	(1,500		)
Unrecognized Tax Benefits at End of Year	$	5,292		$	6,574		$	11,602

As of December 31, 2017 and 2016, $5.3 million and $5.8 million, respectively, in liabilities for UTBs was related to UTBs that if reversed would have an impact on the Company’s effective tax rate.

Management believes that it is reasonably possible that the Company’s liability for UTBs could further decrease as a result of the expiration of statutes of limitations within the next 12 months. However, management is currently not able to estimate a range of possible change in the amount of the liability for UTBs recorded as of December 31, 2017.

The Company classifies interest and penalties, if any, related to the liability for UTBs as a component of the provision for income taxes. For the years ended December 31, 2017, 2016, and 2015, the Company recorded a net tax benefit of $0.1 million, and $1.1 million, and a net tax provision of less than $0.1 million, respectively, for interest and penalties. As of December 31, 2017 and 2016, the Company had accrued $0.9 million and $1.0 million, respectively, for the payment of possible interest and penalties.

The federal tax returns for 2014 through 2016 remain subject to examination. The Company's State of Hawaii income tax returns for 2014 through 2016 remain subject to examination by the taxing authorities.